It is important for Managing Agents and Trustees to understand the concept of claims ratio and the effect it has on the renewal of policies. A claims ratio (or loss ratio) on a buildings policy is the ratio of claims to premiums; in other words, the percentage of claims to premium over a given period. A loss ratio for the year, say 55%, means that for every R100 of premium collected by the insurer during that year, R55 was paid out in claims. In order for the insurer to make a profit, or stay in business, a reasonable overall claims ratio must be achieved.
In the sectional title environment, a claims ratio of between 35% and 55% is desirable to maintain stable premium rates. For every R100 of premium received, the commissions and policy underwriting costs can take up 30% to 40% of the premium, so a loss ratio of 60% may even only mean a break-even position for the underwriting manager/insurer.
What does this mean?
In order for a trustee to deal efficiently with the insurance renewal process, the trustees should be brought up to speed with the concept in question. Rule 29.1.(a) states that the trustees must negotiate premium, excess and rate.
The sum insured amount x the rate = premium
Let’s use an example of a 40-unit building that is insured for R40,000,000:
Sum Insured: R40,000,000
Premium Rate: 0.084%
Premium (Annual): R33,600
Excess (Standard): R500
R40,000,000 x 0.0840% = R33,600
With this policy (at a rate of 0.084%) an acceptable claims ratio is 45%.
Total claims = R15,000 (three claims of R5,000 each – geyser claims).
R15,000 claims Vs. R33,600 premium for the year equals a 45% claims ratio.
If three more geysers had been replaced with one of them adding R10,000’s worth of resulting damage, that would add another R25,000 to the annual loss i.e. the claims paid would amount to R40,000 for the year.
R40,000 claims Vs. R33,600 premium for the year equals a 119% claims ratio.
To get back to a 50% claims ratio, the insurer must double the premium. Alternatively, they need to reduce the claims with an increased excess structure. Therefore, by increasing the excess by 30% an unsustainable policy is “corrected” in terms of pricing.
The trustees should receive a claims history summary together with policy renewal every year. From this they will be able to understand the rates and excesses being offered by the insurer or their competitors. The trustees are mandated to negotiate excess, premium and rate. This is where the professional insurance broker is needed.
A letter of advice and comparative quotes should accompany the annual renewal invitation from the insurer. The trustees should be advised by the advisor / broker about premium, excess and rate as well as understand the effects of the claims ratio and anticipated claims tempo going forward.
For example: If a 40 unit complex is six years old, the geysers need replacing and are insured for geyser replacement, you can only expect a surge in geyser claims over the next 2 years. Premiums will skyrocket unless the trustees consider this and look at a geyser excess structure of sorts. Realistically, a trend over three or more years should be considered; even averaging the ratios over the years.
Trustees, managing agents and insurance advisors can play a huge role in managing the policies i.e. by setting excesses and rates in a sustainable manner. Each building and its owners are unique and the approach can be completely different depending on affordability. A building full of pensioners (fixed income earners) may well prefer a lower excess and higher premium to flatten unexpected costs. On the other hand, a building full of high net worth owners may prefer a higher excess and long term lower rates.
The main issue is to understand the main principles that determine the premium so the trustees can be better positioned to negotiate as required.
Written by Mike Addison, ADDSURE
Contact Addsure, The Leaders in Sectional Title Insurance, to get fit and proper advice from advisors who understand sectional title. Contacts: JHB (011) 704-3858; Durban (031) 459-1795; Cape Town (021) 551-5069.